Look out below: Venezuela's foreign reserves tumbled to under $18 billion for the first time in 12 years on Wednesday.
The cash-strapped South American country has had to navigate a tricky balance. Reduced income from its oil exports is making it harder to pay interest due on international bonds and to import the goods it needs to trim the long lines outside of grocery stores and pharmacies.
Reserves have fallen $6.4 billion in the past three months alone. That's a decline of 26% — the fastest 90-day decrease in at least five years.
Venezuela's dollar bonds, meanwhile, have been on fire, returning 26 percent in the past three months as fears of an imminent default subsided. That's the best return of any emerging market country tracked by JPMorgan Chase & Co.'s EMBIG Diversified Index, where junk-rated emerging market debt averaged a return of only 4 percent over the same period.
While many investors think the country will have enough money to make it through this year, 2016 could be another story, with almost $11 billion of principal and interest payments due between the government and state oil producer PDVSA.
That begs the question: How low can Venezuela's reserves fall until investors start to worry again about whether or not the country can pay its debt?
When you compare the ratio of Venezuela's foreign reserves to its GDP with regional peers and other oil producers, the country achieves a mediocre score, with a ratio of about 8.5 percent.
The data released by Venezuela's central bank, however, has come under increasing scrutiny, with many investors questioning just how much of its reserves are actually liquid. Venezuela's cash reserves may have already fallen to zero, Jefferies LLC strategists said May 1. Other analysts say it might not be that bad. Only 15 percent of the country’s reserves were held in cash as of the end of March, according to Bank of America.
Venezuela currently holds about 69 percent of its reserves in gold, according to the World Gold Council.
"The operational level of reserves, the cash level of reserves, has been low for long, and it's been alarming for people for a while," Ben Ramsey, an economist at JPMorgan, said Friday in a telephone interview, estimating that Venezuela's liquid reserves were currently around $2 billion. "But then I think that people realized that Venezuela was operating regularly with its low level of operational reserves. It's not that people aren't paying attention to reserves. I think they are, and when you reach new lows, it starts to raise eyebrows."
The rally in Venezuelan bonds has been helped by rising oil prices and increased appetite for riskier assets, he said. WTI oil increased 5.5 percent over the past three months, while Brent rose 8.5 percent, according to data compiled by Bloomberg.
"The draw-down in reserves was assumed to be part of the equation," Ramsey said. "If you were just looking at payments versus reserves and there was no other inflow of dollars, then you'd be worried. But we have other inflows which go to finance other outflows."
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